The Day the United States Defaulted on Treasury Bills

Abstract

Because of severe technical difficulties, the U.S. government was unable to repay investors in Treasury bills (T‐bills) in late April through early May, 1979. This incident led to a 60 basis point increase in T‐bill rates at the initial occurrence of the default. Unlike other information effects of that era, such as Henry Kaufman's predictions or Paul Volcker's “Saturday night special,” this increase in rates was not offset by a subsequent decrease in rates after the Treasury cured the default. The default apparently warned investors that Treasury issues were not completely riskless, which translates into a $12 billion annual increase in federal interest payments as a result of the 60 basis point permanent increase in interest rates.

The increasing default risk of US Treasury securities due to the financial crisis

“…The first option, if used unwisely can lead to hyperinflation making paper money worthless while the use of the second option is limited by the checks and balances that exist in a democracy to counteract high taxes. Due to these reasons among others and the fact that the US Treasury defaulted earlier (Zivney and Marcus, 1989) and came very close to defaulting a second time (Nippani et al, 2001) the question of default-free Treasury securities has come into question. Zivney and Marcus (1989) show that there was a 60 basis point increase in Treasury bill rates at the initial occurrence of a default by the United States Treasury in May 1979.…”

Creditor Nations’ Equity Indexes and the U.S. Debt Downgrade

“…Thakor (2006) who discussed the work of Kotlikoff (2006) disagrees, but cautions against excessive borrowing by the U.S. Treasury. Zivney and Marcus (1989) examined the impact of a temporary, technical default by the U.S. government and showed that yields increased following the default. Nippani, Liu and Schulman (2001) showed that under some circumstances, risk premiums were charged on short-term U.S. Treasury obligations, and Nippani and Smith (2010) showed the same for long-term U.S. Treasury debt.…”

“…This debt has been rated AAA since ratings began and while the U.S. Treasury debt had been placed on "Creditwatch" earlier by rating agencies like Moody's (Note 5) it has never relinquished its AAA rating prior to 8-5-2011. There was a default by the U.S. Treasury, a technical one in 1979 (Zivney and Marcus, 1989). Evidence of default risk premiums on short-term and long-term U.S. Treasury securities was documented by Nippani, Liu and Schulman (2001) and Nippani and Smith (2010).…”

Fiscal Policy, Trigger Points and Interest Rates: Additional Evidence From the U.S.

“…Results from studies using a VAR-framework are more 1 Zivney and Marcus (1989) find that the only known instance of technical default in the U.S. in 1979 caused a 60 basis point increase in T-bill rates. 2 The Council of Economic Advisers (2003) estimates that interest rates rise by about 3 basis points for every additional $200 billion in government debt.…”